UK deal could be a game changer for this security company

Coronavirus hurt these shares, but this ‘immune’ business can bounce back from the stock market panic.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

It’s the stock that nearly got away, the stock that soared off any sensible investor’s radar but has been dragged back to earth by the general stock market crash. Once again, it is worth taking a look at American private security and protection company The Brink’s Co (NYSE:BCO).

Brink's was named after its founder Perry Brink’s and was originally based in Chicago but now has its headquarters in Richmond, Virginia. It is divided into two segments. The larger core services side transfers cash between business and financial institutions including central banks. It also manages ATM. The smaller side offers high-value services such as moving diamonds and jewellery and managing cash for wealthy individuals.

Since it spun off its home security operations into a separate company in 2008, it has been in expansion mode and now has operations around the globe. It employs more than 62,000 people in 40 countries, although the United States remains easily its largest market.

The company was virtually unknown to most UK investors until reports emerged last summer that it was preparing to make a £1 billion bid for the international cash-handling division of London-listed security group G4S (LSE:GFS). This operation transports and stores money for banks and retailers.

Last week, agreement was finally reached on a deal for the majority of the division for £727 million, including some debt and pensions liabilities. Excluded were operations in Britain and South Africa and the technology unit.

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The acquisition fits well into the Brink’s business, adding annual turnover of £600 million. It’s a service that will always be in demand and should be reasonably sheltered from any possible impact from trade wars.

There are caveats, not least that this is a large acquisition for a company with a market capitalisation of $4.2 billion. However, there were fears that other potential buyers such as Prosegur Compania De Seguridad (XMAD:PSG) could well emerge, forcing Brinks into overbidding. That has not happened and G4S has been looking to get out for the past 12 months, so it was unable to stick out for an unrealistic price.

It looks as if Brink’s has been able to cherry pick the best bits, and analysts in the UK reckon that the price should have been £100 million higher. So often it is a keen buyer who gets the worst of any acquisition, and the outcome is that damaging cost cutting is necessary to justify the price paid. In this case it is G4S that is seen to have fared worse.

This could be a game changer for Brink’s, whose last big move was the demerger of its home security operations in 2008. After that happened, the shares moved sideways between $20 and $30 for eight years before shooting rapidly to $87 in September 2017 and subsequently peaking at $93 early last year. 

Source: interactive investor  Past performance is not a guide to future performance

When they came off the boil in the summer, I intended to point to the buying opportunity that had opened up, and actually had a column half written when the shares were starting to recover and had reached $76. Alas, as I was writing they shot well above $80 in two trading days and I felt I could no longer recommend the stock at that stage.

It can be a tough choice whether to chase shares higher or walk away and put it down to experience. In fact, they were still worth picking up for a short-term gain, as they ran as high as $96.35 at the start of this year, but the coronavirus scare has dragged them as low as $78.

This seems unfair, as this type of business is relatively immune from the supply chain issues besetting manufacturers who buy from China. The stock should be among the first to bounce back from the stock market panic.

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It has to be admitted that results for 2019 fell short of analysts’ expectations. While revenue at $3.7 billion were up to scratch, that didn’t translate into earnings, which were only half the expected level at 55 cents per share.

However, analysts remain optimistic for this year, expecting revenue to rise by nearly 3% and earnings per share to bounce back sharply to nearly $4. They see the share price recovering to top side on $100 before this year is out. The G4S deal could be a game changer.

Hobson’s Choice: The shares are currently below $79. Buy below $85. That price, which I do not expect to be achieved for a little while, represents a reasonable balance between risk and potential reward. Don’t chase the shares any higher at this stage, though. Be prepared to miss out again if the stock market rebounds and pulls Brink’s higher. 

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.